February 1, 2023

During the pandemic, many luxury brands pledged to curb or even end discounts that had become a year-round habit in many corners of the industry. Keeping that promise turns out to be more difficult than expected. To understand why, it would be helpful to look back at how the industry has navigated in recent years:

From the 2010s, the two-season luxury calendar turned into countless drops throughout the year. Online, brands and retailers competed for attention by sending emails and updating their landing pages to hype new products. These tactics have proven to be a great way to boost sales, but they have made planning a challenge: how much to buy and in what colorways becomes more complicated as more and more products hit the market at any given time. The probability of over-ordering a particular item is multiplied by this approach, hence the need to provide discounts to convert that excess inventory into cash. In other words, as a direct result of the world chasing luxury in the name of innovation, in-season price cuts have become more common.

The pandemic, forcing immediate and drastic cutbacks to get rid of excess inventory, felt like a tipping point in this race to the bottom. A group of fashion designers, retailers and executives led by Dries Van Noten wrote a heartfelt open letter to the fashion industry advocating a reshuffling of seasonal deliveries and sales periods, the production of fewer goods and less travel for fashion weeks and purchasing appointments. Dries emphatically described the price cuts during the season as “a knife in my heart”.

For the most part, major brands weren’t signatories to that letter, but around the same time they were making their own efforts to take back control of pricing, including moving away from wholesale or switching to concession formulas. In fact, Prada had announced in early 2019 that the group would stop discounting and refocus on full-price sales. Indeed, from the first half of 2019 to the first half of 2022, the group’s wholesale sales are down 39 percent, while direct-to-consumer sales are up 38 percent. The group was praised in the wake of 2021 results for its shift to full-price sales, which contributed to a 41 percent revenue growth.

These moves have come at the expense of multi-brand online retailers such as Yoox Net-a-Porter, Matches and Farfetch (the latter of which is nevertheless offering up to 60 percent off at the time of this publication, which coincidentally includes 38 Prada items).

A necessary evil

This holiday season, discount seems to be making a comeback. There is no global supply chain crisis that will keep products off the shelves like there was in 2021. Instead, fears are growing that 2023 will be a challenging year, with fears of a global recession that may push companies to expand their coffers. fill, even at the sacrifice of margin. Looking further ahead, McKinsey also estimates that between 2025 and 2030, off-price sales are likely to grow five times faster than full-price.

However, there are a few tricks brands can pull to minimize the impact of discounts on brand perception and ultimately business valuation.

The first is to limit off-price sales to outlet destinations like Bicester Village. These have the advantage of being a destination format, so customers have to choose between shopping at full-price stores on high-end high streets or traveling to an outlet in the hope of a bargain. The latter choice often means that the customer is already ready to spend money.

Another strategy is to have more targeted discount initiatives, such as rewarding higher spending customers with early or exclusive access to certain discounted items. For example, Dior Beauty has a loyalty program whose four tiers offer exclusive benefits that reward members’ interactions with the brand.

A common practice in the beauty industry is to offer bundles or kits in conjunction with a price incentive as a means of increasing average customer spend or to offer a gift with purchase incentives, again to increase average customer spend. This is a great way to attract customers while maintaining brand cachet in an increasingly competitive brand landscape.

Finally, there is a strong sustainability message associated with discounting rather than destruction that could be aimed at the emerging, more socially aware consumer. As in the case of second-hand luxury, this could be managed in such a way that there is little overlap between a brand’s regular consumer and a consumer who does not yet have the means to buy the brand, but is striving to promote the brand. to buy. the future.

The Savigny Luxury Index (“SLI”) gained 15.5 percent in November as China eased Covid-19 restrictions and the industry looked forward to a strong holiday selling season, outperforming the MSCI by 9 percentage points.

SLI vs MSCI

Market pulse Dec

Go up

  • Shares of Richemont rose in the wake of the jewelry group’s profit decline in the first half. The stock ended November 27 percent higher.
  • Share prices of U.S. stocks Capri and Ralph Lauren rose 26 percent and 22 percent, respectively, on positive economic data in the U.S. and strong financial performance in the third quarter.

Crash

  • All stocks in the SLI posted gains this month.

What to watch

While luxury brands are still counting the cash in their tills from the Western Hemisphere’s Christmas sales, there’s still Chinese New Year and, to a lesser extent, Valentine’s Day. Lunar New Year may not be the coupon bonanza that Singles Day is, but it’s nonetheless an extra sales period that luxury brands can count on.

Industry appreciation

Market Pulse Dec

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